Why additionality matters

Yesterday I posed the question, “Why all the fuss about additionality?” Today I answer that question.

Recall that you hear at least two lines of argument about why we should stop worrying about strict additionality. The first is that strict additionality is too difficult to measure. We should therefore redefine the concept of additionality to be “projects we like” so that offsets can be used to reward renewable energy development and other good things. The second is a twist on the first: additionality is too hard to measure, so we should chuck out the whole idea of offsets and unlink subsidies for projects we like from carbon markets.

Neither of these criticisms addresses the theoretical appeal of strict additionality, which is uncontroversial. Even critics of additionality in practice would probably agree that if additionality could easily and reliably be measured, we would want to favor additional projects over non-additional ones.

Instead, the criticisms focus on the practical utility of additionality. So setting aside the theoretical appeal of strict additionality, are there practical reasons why we should embrace strict additionality, even if we know we can’t measure it perfectly?

The answer is a clear yes, and the reason is that additionality is key to the integrity of carbon markets. Offsets aren’t simply a tool for rewarding good projects, such as methane digesters on small dairy farms. Rather, offsets are a financial instrument that link good projects into a regional or global marketplace for emissions reductions.

If such markets are to have any integrity, offsets must be additional. If the offsetting reductions would have happened in the absence of the carbon market, the market as a whole will fail to achieve its environmental objective.

Further, one of the main purposes of a carbon market is to set a clear price for carbon emissions that industry can use for planning and investment purposes. If offsets are non-additional, that price becomes distorted. The market ceases to function properly.

The second criticism of additionality is therefore more coherent than the first. Offsets, after all, aren’t strictly necessary for a cap-and-trade system. If you get rid of offsets, you get rid of additionality concerns.

The problem here is that you also lose out on a potentially vast source of carbon reductions. Attempts have been made to estimate the potential global supply of offsets. Although these efforts are admittedly rough, they generally place the figure in the billions of tons of CO2.

Keeping in mind the higher-order goal of reducing CO2 emissions as quickly and cost-effectively as possible, it is worthwhile to integrate those billions of tons of potential savings into the global carbon market. And additionality is the key to doing so.

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adam

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  1. Chad - March 20, 2007

    Addionality does not matter a whit. It is both a figment of our imagination, and a market-driven inevitability.
    Imagine I buy a pencil tomorrow. Do I worry about who produced that pencil? Does some pencil-maker run out to his factory and yell “Hey, Chad bought a pencil! We need to make one more pronto!”? Of course not. But it is also obvious that my pencil-buying will, on the average, cause one more pencil to be produced by someone somewhere. That is the magic of the market.
    The Business Week article claims that some farmer doesn’t care about a $16,000 check. Or that some windfarm doesn’t care about a 5% subsidy. That requires far more faith than believing that an increase in demand will result in an approximately equal increase in supply.

  2. Adam Stein - March 20, 2007

    Chad –
    I partially agree with you. I don’t agree that additionality doesn’t matter (for the reasons above). I do agree that the vision of additionality in which a purchase of every single offset can be traced directly back to a single ton of CO2 reduced is naive. Additionality matters more on a project level than on a per ton level.
    - Adam

  3. Chad - March 21, 2007

    If someone was already going to do it, its is fair to assume that what we mean is that it was already profitable for them to do it without the offset subsidy. Profitable, in the case of any serious enterprise, fundamentally involves things like Return on Net Assets (RONA) and the like. If a company “already decided to do it”, this implies that the RONA was at or above their target level without subsidy. Therefore, the subsidy, even arriving after the fact, will increase RONA above their target.
    What does a corporation do when its RONA gets high? It expands further into whatever areas are providing the good RONA. In other words, additionality happens anyway. Maybe not in the same place, or the exact same manner. But it will happen.
    Giving my Terrapass dollars to an already-existing wind farm, for example, either means that the wind farm will expand, that its competitors will expand to catch a bigger share of the windfall, or both. I am perfectly happy with that. It is unnecessary for me to know exactly which windmill my dollars helped pay for, or to be offered proof of which one my dollars went towards.

  4. Aaron A. - March 22, 2007

    If someone was already going to do it, its is fair to assume that what we mean is that it was already profitable for them to do it without the offset subsidy.

    In the case of methane flaring, there is no profit without offset revenue. Heck, there’s no revenue without offset revenue. So they almost certainly would have started this project with one of two goals:
    (1) Turn a profit selling credits, or
    (2) Lose money, but earn lots of good publicity.
    Considering that they’d probably get good press for their “greening” either way, I’m leaning toward #1.

    Also, it’s important to consider not just whether the project would be profitable, but profitable enough to beat out the alternatives.

    – A.

  5. Yaguar Cielo - March 28, 2007

    Chad,
    You bring up a great point and one that I think should be better defended by those in the offset industry. Why are we expecting absolute perfection from a market that is so premature? Aren’t we simply trying to show that there can be a market for carbon reductions? It’s becoming clear, whether or not any of these projects are “additional”, that there can and will be buyers and sellers of credits once we put a price tag on pollution and pollution reduction. The only reason additionality comes into the picture at this early stage is because some people, Trexler included, seemed to benefit by making these markets appear more rife with legitimate holes than with real promise. That’s not a perspective that helps anyone but Trexler in the short-run. The quality issues that do exist were and are being sorted out in real time by all participating parties. That is and should be the long-term solution. Until the markets have proven themselves, it’s hard to spend the dollars and time making sure that every cent spent meets such a high bar of minimum quality. A much more reasonable way to make it all happen is to measure emissions in period A and generate credits in periods B, C, and D, when periods B, C, and D clearly have less emissions than period A. Ignore the question, at least at first, about whether or not these were “additional” reductions that would have happened without the markets. What markets? Let’s prove that they exist first.

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